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Should I keep my emergency fund in my bond?

Or are there better investments I could make?

I resigned from a job and started a business. I took R300 000 of my pension out as an emergency fund and left the remainder in a preservation fund. I am currently earning enough and have no need to dig into the R300 000. I have a bond of roughly R1 million that I am paying off and vehicle finance of about R280 000. I have put the R300 000 into the home loan account and I still pay the bond and vehicle from my salary on a monthly basis at the amount I was paying before the interest rate decreased. The interest on the bond is prime plus 0.25%. Is it advisable to keep the money in the bond or are there better investments that I could make considering my current situation?

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Dear Reader,

Congratulations on starting your own business.

What to do depends where you are financially in terms of your retirement saving and other goals. Since I do not have enough information about you, my response is limited to the following.

Depending on how long you have to go until retirement and whether or not you have saved enough for retirement I would suggest that you put this money back to work for the purpose of providing for your golden years. What we know is that only 6% of South Africans can afford to retire without having to depend on other sources of financial support.

You may choose to invest the money in a retirement annuity since you are currently not contributing to a retirement fund. This will be very tax-efficient in terms of what you can claim in your tax return as well as the growth on the investment portfolio. You will not be taxed on the growth in this investment structure, which is not the case with a unit trust, cash, or shares in discretionary investments.

Example of retirement annuity deduction on retirement contributions:

  • Let’s say you earn R750 000 per year: you would qualify for a deduction on a R206 250 (R750 000 x 27.5%) contribution into a retirement annuity fund for the year.
  • At the current tax rate, you would qualify for a refund of R84 562.50 from the South African Revenue Service (Sars).
  • This means you would save R84 562.50 in tax in the current tax year, meaning that you would be ‘out of pocket’ by only R121 687.50 (R206 750 – R84 562.50).

If you prefer to have access to the funds, you can look at unit trust investments or choose from the many other discretionary options available.

Be sure to check the terms of the investment so you can avoid being locked in for five years and then having to pay penalties for accessing the funds.

When you look at the growth aspect of the various investment options, you need to consider how long you plan to invest for. If this investment is for the shorter term, then taking on risk in an equity investment is not advisable. Bear in mind that keeping your money in cash erodes the buying power over time as the growth will not keep up with inflation. Depending on what your shopping basket looks like, your inflation rate will most probably be higher than the government’s inflation band.

You mention that your bond rate is 0.25% over prime, which is currently 7%; that makes the interest rate 7.25%. By putting your money into the home loan account, you’re effectively earning a 7.25% return on your investment (at very little risk). Furthermore, if it’s a flexible home loan, you can withdraw funds when you need them (say if the business needs emergency cash/liquidity).

The smart thing to do is to speak to a certified financial advisor who will look at your current situation and advise the most appropriate course of action for your needs.

Do you have any questions you would like answered by registered financial planners?

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COMMENTS   11

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In my humble opinion the lady gave a good answer.

Really? These readers questions are always suspect. Just another adviser trying to drum up business. In any case the best advice to this question is that if the ANC is in power then the best place to keep your emergency funds is in $ under your mattress..

Not ideal… too many people in SA looting and burning things (down) to the ground.

A ‘balanced’ response – yes

If it was me the only option is…” By putting your money into the home loan account, you’re effectively earning a 7.25% return on your investment” – it is also effectively tax free because it is lowering interest payments @7.25% and not generating interest at a measly rate.

If you want a ‘guarantee’, invest it in a RA and you will be guaranteed to have less money when you withdraw / retire then what you initially invested

Yes! Also – having the money in the mortgage means you have immediate access for new business emergency. Just stay conservative what you use it for.

Maybe if the car finance is very expensive interest, pay that off but pay the car payment into an RA

What worked for me:
1) pay off the most expensive debt ie the vehicle which is the highest interest rate
2) after that put the vehicle payment also in the bond
3) after that take both payments and invest it.

I could’ve invest it in the first place on the assumption that my investment will grow better than the debt and at “breakeven” pay off the debt. But I did’nt know that the investment will grow faster than the debt. So I opted to pay off the debt as quickly as possible and then keep on paying both payments into an investment.

This boggles my mind. If someone asks you about about where to keep emergency funds, why would you spend the first half of your response talking about retirement annuities? He’s just said he’s kept the rest of his pension in a preservation fund, so he probably knows about the tax benefits of and need for retirement savings, and nothing stops him from contributing a portion of the new salary from the business towards further retirement savings.

But what about the emergency fund? What happens if the business is in trouble and he needs those funds to bail him out and not lose his house and car?

The main concerns are Liquidity, Capital Preservation, and Liquidity. If there is any risk that your bank would limit access to funds in the event of a financial emergency (depending on the institution or bond type), require applications for re-advance, do re-assessments, or require home valuations or any type of nonsense, keep looking.

Unit trusts could be a good option, provided it’s with a low-cost provider, and a fund skewed more towards cash and bonds, and less towards property and equity.

Personal opinion, none of this is advice, I’d work out what’s the minimum amount I need to keep afloat for about 3-6 months, and use the rest of the money to pay down the expensive car loan.

Thanks Mr Groenewald. Wisdom right there. Will be my advisor?

None of the above.

It’s for peace of mind, not for investing.
In my experience, once I got out of debt I regarded my EF as my softest pillow; didn’t stress about it “working” for me.

Get out of debt as fast as possible before you start investing. That’ll give you added peace of mind. So, put R100k in a simple savings account. Use the rest towards paying off your car.

Agree with many comments, e.g. rather use extra access-bond funds to kill or reduce car-debt or other short-term debt (like that of retail stores) which carries higher interest rate than the home loan.

There are essentially 2 types of debt: ‘good’ & ‘bad’ debt. Good debt is on APPRECIATING assets (like real estate or a business loan). Bad debts are those on DEPRECIATING assets or consumables.
If you must, try to reduce those higher-interest car or furniture or credit card debt buy transferring from home loan access-bond, and keep your homeloan debt (and business debt..as interest is a tax deduction) larger.

If you’ve already done the above, and mostly have homeloan debt left over….it does not hurt to pay it off as long possible (yes, you pay more interest over the period of loan, but over 10+ years’ time this extra interest is ‘future value’ and not ‘current/present value’. Allow then INFLATION to reduce the present value of your homeloan debt over time.

(…and besides, interest rates are as low as ever, so perhaps look at other investment opportunities with those access bond cash….like owning those Platinum stocks or Bitcoin, you always wanted to own 😉

With CYBER SECURITY issues, I feel a bit uneasy to keep so much money in one’s access-bond. IF your online banking profile gets compromised, it’s as good as transfering the cash from your access-bond to your current account (subject to daily transfer limits)…and then hacker can buy crypto using your capital or buy things he wants using your current account.

Alternatively, when you instead keep the access-bond amount as low possible (say enough for one or two months’s emergency cash) and get the balance moved to unit trusts / EFT’s / share portfolio (which you can withdraw at any time)….a hacker cannot buy crypto or buy goods using your Coronation or Allan Gray or Easy Equities profile. They can only withdraw….and it can only go (as result of FICA) to your own bank account held in your name.

Holding investments (even if it’s low risk Income Funds) in asset managers, or share portfolio accounts are generally less enticing for a hacker to access…because the functionality what to do with your money is way less.

But having a scammer unauthorised access to your online banking profile…money in your homeloan access account is the same as a “cash heist”. Be mindful of this.

If one has the guts for it I would have put the money in overseas ETF’s. You make money if the rand should weaken and you make money when the ETF grows.

End of comments.

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